Nokia-Microsoft Derivatives for AAPL, Samsung, Ceva, QCOM, BBRY

By Tiernan Ray

With Nokia (NOK) and Microsoft (MSFT) announcing this morning the latter will buy Nokia’s handset business for $7.2 billion, a number of analysts reflected on the possible derivative outcomes of the transaction.

Several analysts see potential take-out targets, including Alcatel-Lucent (ALU) and Ruckus Wireless, should Nokia use its newfound largesse to make equipment acquisitions, as I noted earlier.

Oppenheimer & Co.’s Ittai Kidron, while raising his rating on Nokia to “Perform” from Underperform, sees a boost for Samsung Electronics (005930KS) and others, and negative implications for BlackBerry (BBRY):

We expect Microsoft to deemphasize/potentially abandon Nokia’s feature-phone business, which offers potential upside for Samsung and the Chinese vendors and their supply chains. We view the deal as negative for BlackBerry with Microsoft removed as a potential buyer and competitive pressure likely to escalate as Microsoft more aggressively pushes Windows.

Note that Merrill Lynch‘s Tal Liani also had some negative remarks out about BlackBerry today pertaining to the deal, though I have not obtained a copy of that report. Despite the negative commentary, BlackBerry shares rose 9 cents, or 0.9%, to close at $10.21 today.

As I noted earlier, Wells Fargo‘s Maynard Um, who follows Apple (AAPL), today ponders whether the company may experience greater pressure to come out with a television set of its own, if Microsoft combines its Xbox video game and entertainment center with the Nokia mobile assets.

JMP Securities‘s Alex Gauna reiterates an Outperform rating on Qualcomm (QCOM) shares, and an $80 price target, predicting a boost from the acquisition of one of its largest customers, writing “Qualcomm
has 100% smartphone share at Nokia and we believe its takeout by Microsoft affords financial and operational leverage that should modestly improve forward prospects.”

Gauna also notes that Qualcomm is holding its developer summit, Uplinq, in San Diego this week:

Over the next few days at Uplinq, we expect Qualcomm to showcase 1) solid design win and developer momentum behind its Snapdragon Apps processors; 2) broadening Snapdragon 800 adoption that includes a number of high-end handsets being unveiled this week in conjunction with the IFA electronics trade show; and 3) expanding reach beyond cellular connectivity in handsets to include tablets, M2M, and the internet-of-things. Our $80 price target is based on 15x PE/CY14 our estimate of $5.10 ($5.02), a multiple consistent with our coverage mean in the mid-teens.

The Benchmark Company’s Gary Mobley reiterates a Buy rating on chip intellectual property vendor Ceva (CEVA), noting it gets about 15% to 17% of its royalty sales from Nokia’s sales of less sophisticated “feature phones.”

While some analysts today opine Microsoft may dump the feature phone products, Mobley sees no adverse impact for Ceva:

From Microsoft’s perspective, this acquisition is clearly about taking ownership of hardware in order to push the Windows Mobile OS into smart phones and tablets. Microsoft feels the need to have a good smart phone platform in order to experience success in tablets (e.g. to augment the unsuccessful Surface tablet push from last year). While the acquisition is all about removing any impedance for the development of the Lumia product line, Microsoft appears committed to the Asha features phones as well as other low-end and feature phone platforms. As long as this happens, CEVA’s royalties tied to the Nokia phones should remain on an unchanged trajectory at least through 2014. It is hard to say how Microsoft will shift its philosophy regarding apps/baseband processor development. In other words, it is unknown whether Qualcomm will remain the only merchant chip vendor supporting the Windows Phone platform. Microsoft already has an ARM ISA license agreement, and if Microsoft decided to internalize the development of apps/baseband processors, CEVA may have an opportunity to license its DSP engines to the software giant. Alternatively, should Broadcom or Intel decide to support Windows Phone, CEVA could become part of the Lumia product line. To put things into perspective, the Windows Phone OS had only 3.3% market share in 2Q13. Additionally, Samsung most likely drives 2.0x-2.5x the royalty units for CEVA when compared to Nokia.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.